I am an e-Money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail. Currently, I serve on the Board of Directors for the Bitcoin Foundation.

Largest Bitcoin Payment Processor Raises $510,000 Angel Round

BitPay, Inc. announced today that they have completed a seed funding round of $510,000 from several angel investors demonstrating that bitcoin can attract the capital necessary to encroach upon legacy payment methods. Similar to merchant processors for credit and debit cards, BitPay is a Payment Service Provider (PSP) specializing in eCommerce, B2B, and enterprise solutions for virtual currencies.

Investors participating in the seed round include SecondMarket founder Barry Silbert, Spotify investor Shakil Khan, Jimmy Furland, Roger Ver, and other Internet entrepreneurs. Specific terms of the deal were not disclosed but co-founders Anthony Gallippi and Stephen Pair will retain majority ownership. Investors Silbert and Ver also participated in the April 2012 funding round for mining pool operator CoinLab.

CEO Anthony Gallippi says, “BitPay plans to use the funds to move the headquarters from Orlando to Atlanta and to hire additional developer talent for enhancement to the BitPay platform.” With proximity to other financial technology companies and several leading universities, Atlanta provides an excellent base for expansion.

Gallippi added that the WordPress decision to begin accepting Bitcoin via BitPay for certain features is “what really accelerated this funding round because investors saw it as the ideal time to move forward.” Since the November 2012 WordPress deal, BitPay has seen new merchants increase by nearly 50% to over 2,000.

The total dollar value of all bitcoin transactions processed by BitPay in 2012 was over $3 million, which represents average quarter-to-quarter growth of 50% over the past four quarters for transaction volume.

“With very little resource, BitPay has already taken the place as market leader in the bitcoin payment processing ecosystem, and along with the other investors, I am very excited to help the founding team scale up and take it to the next level,” said London-based Shakil Khan, an early investor in Spotify and SecondMarket.

The value proposition to merchants is clear — eliminate fraud and chargeback risk, accept transactions from any country in the world, and increase profitability by saving on processing fees and PCI Compliance costs.

“Credit cards were never designed for the Internet,” stated Gallippi. Using a credit card over the internet is a situation known as card-not-present. “It was never intended when credit cards were designed, and when we try to use them this way it carries higher processing fees and substantially higher risk. Payment fraud represents nearly 1% of our GDP [$100 billion] in the United States.” Shockingly, the large majority of that is a direct hit to the retailers.

Although BitPay is the worldwide leader now with payment plugins for the most common eCommerce shopping carts and multilingual support in over eight languages, they will have to continue innovating with superior features and expanded settlement currency options.

The overwhelming majority of BitPay merchants settle in U.S. dollars because the company does not yet offer direct settlement into other currencies. Furthermore, as almost all merchants start out converting 100% of their Bitcoin proceeds into U.S. dollars, the company acknowledged that the trend is heading towards 50% or less as merchants increasingly decide to maintain proprietary Bitcoin balances.

While that may be good for the future of bitcoin, it alters the business model for payment processors like BitPay because they are forced to rely more on the Bitcoin-only processing spread which is justified by customer support and user-friendly plugins. Also, they risk being seen as just an unnecessary intermediary.

In a bitcoin-only world for selling and buying without conversion to national fiat currencies, the line between processors and wallets becomes blurred. If the bitcoin payment processing industry is indeed headed towards sophisticated, feature-rich deterministic wallets and built-in risk management functionality, the leading processor should have a great advantage in steering the transition.

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I wonder how long it will take the rest of the world to realize that the ability to move money instantly, anywhere, with zero chargeback risk, is valuable. People laughed at Bitcoin because it was “purely digital”… as if the internet itself wasn’t.

BitPay reported that it was more likely due to becoming comfortable with holding bitcoin in general and a store of value until procurement choices expand. However, for merchants interested in bitcoin it is an inexpensive way to acquire BTC.

The biggest thing BitPay has going for it are Stephanie and Allison. 1/2 million is hardly any money at all. They will soon be using that money for a second round of financing. But with Stephanie and Allison’s help I think it can be accomplished. They are Hot. For me I would have thought a better investment would have been bitcoins.